Mergers and acquisitions can be excellent ways for businesses to expand their markets.
They are also great options for business owners who wish to move on to reap the rewards of all their hard work.
Mergers and acquisitions are for more than just mega-corporations. Small and medium-sized businesses can benefit from combining as well.
The benefits of a merger or acquisition can be immense. However, business combinations are not suitable for every business.
Acquisitions in business can be complicated, and there are always risks involved. Before pursuing a merger or acquisition, it is essential to develop an understanding of how they work in Texas.
Benefits of Mergers and Acquisitions
Ultimately, the primary purpose of a merger or acquisition is to increase profits in the long run. This goal can be achieved in several different ways.
Some of the advantages that can be achieved through mergers and acquisitions include the following:
- Obtaining top talent,
- Access to new resources,
- Entrance into new markets,
- Economies of scale,
- Economies of scope, and
- Access to certain tax benefits.
Obtaining these benefits can give a company a competitive advantage and increase profitability.
Risks of Mergers and Acquisitions
Mergers and acquisitions are associated with numerous risks. These risks can destroy the value of a deal and undermine profitability.
Some of the most prominent risks include:
- Overvaluing the target company,
- Undervaluing the company being sold,
- Failures in due diligence,
- Miscalculating the benefit of different advantages, and
- Issues integrating the two companies.
When pursuing a merger or acquisition, conducting a thorough risk assessment is essential. Many of these risks can be mitigated through proper planning and deal controls.
If the risks are too significant, walking away from the deal is often the best option. An experienced mergers and acquisitions attorney can help you perform a thorough risk assessment.
Types of Business Mergers
A merger is the combination of two or more businesses into a new legal entity. The result of a merger is a new company.
Businesses can engage in five primary types of mergers: conglomerate, congeneric, market extension, horizontal, and vertical.
A conglomerate merger happens when two or more businesses that are engaged in unrelated businesses combine to form a new company.
This type of merger is relatively rare and best suited for big corporations.
When two or more companies in the same market with similar products combine to extend their product lines, they have performed a congeneric merger.
Often these companies can access a larger market because they have complimentary products.
Market extension mergers occur when two companies that sell similar products in different markets combine.
By combining, these companies expand their markets and can benefit from economies of scale and scope.
Horizontal mergers take place between competitors. Businesses that merge horizontally benefit from expanded market share and reduced competition.
Finally, when two companies that operate on different levels of the same supply chain merge, it is called a vertical merger.
Vertical mergers can reduce input costs and reduce supply chain risks.
Business Mergers Examples
The merger between Exxon and Mobil is one of the most successful mergers in American history.
In 1998, the two companies agreed to form ExxonMobil in what was, at the time, the largest merger ever.
The merger proved to be a huge success, almost quadrupling shareholder value over a short period. ExxonMobil remains a powerhouse in the oil and gas industry to this day.
The combination of AOL and Time Warner is an example of a merger that went horribly wrong.
The combination of two drastically different companies did not end up working out. AOL Time Warner’s stock price dropped dramatically after the merger, largely due to the poor combination.
In 2009 the two companies broke up, and AOL Time Warner was dissolved.
An acquisition occurs when one company buys most or all of the assets of another company.
When a business acquires a controlling interest in another company, it is also considered an acquisition.
Acquisitions in business are made for a wide variety of reasons. The result of an acquisition is that the purchased company ends up under the purchaser’s control.
Business Acquisitions Example
One of the most prominent and successful modern acquisitions is Disney’s acquisition of Pixar in 2006.
Market analysts were skeptical of the deal given the $7.6 billion price tag, but in the end, the acquisition delivered.
The integration of Pixar into Disney added the talent necessary to produce hit films such as Frozen.
Further, the integration paved the way for Disney to buy other companies, such as Marvel.
Mergers and Acquisitions Under Texas Law
Though Texas generally has a favorable business climate, there are requirements that every company must follow when engaging in a merger or acquisition.
For example, to merge with or acquire a company, businesses must:
- Get approval from the board of directors,
- Get shareholder approval,
- Meet all requirements and satisfy all duties, and
- Follow all state and federal laws.
The best way to ensure that any merger or acquisition meets all the legal requirements is to work with an experienced mergers and acquisitions attorney.
Business Mergers and Acquisitions Consulting in Texas
If you are planning on pursuing a merger or acquisition in Texas, Massingill Attorneys and Counselors at Law can help.
Our firm serves clients across a broad range of industries and can negotiate, draft, and close complex business transactions.
At Massingill, we pride ourselves on making the complex simple. Our business attorneys will focus on the necessary details, so you can keep your eye on the big picture.
Contact us online to schedule a consultation today to learn more about how we can help you with your next transaction.